Medicaid Program; Prescription Drugs, 77174-77200 [06-9792]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 71, Number 246 (Friday, December 22, 2006)]
[Proposed Rules]
[Pages 77174-77200]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9792]



[[Page 77173]]

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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 447



Medicaid Program; Prescription Drugs; Proposed Rule

Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / 
Proposed Rules

[[Page 77174]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2238-P]
RIN 0938-AO20


Medicaid Program; Prescription Drugs

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement the provisions of the 
Deficit Reduction Act of 2005 (DRA) pertaining to prescription drugs 
under the Medicaid program. The DRA requires the Secretary of Health 
and Human Services to publish a final regulation no later than July 1, 
2007. In addition, we would add to existing regulations certain 
established Medicaid rebate policies that are currently set forth in 
CMS guidance. This rule would bring together existing and new 
regulatory requirements in one, cohesive subpart.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on February 20, 
2007.

ADDRESSES: In commenting, please refer to file code CMS-2238-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to https://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-2238-P, P.O. Box 8015, Baltimore, MD 21244-8015.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-2238-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Kimberly Howell, (410) 786-6762 (for 
issues related to the determination of average manufacturer price and 
best price).
    Yolanda Reese, (410) 786-9898 (for issues related to authorized 
generics).
    Madlyn Kruh, (410) 786-3239 (for issues related to nominal prices).
    Marge Watchorn, (410) 786-4361 (for issues related to manufacturer 
reporting requirements).
    Gail Sexton, (410) 786-4583 (for issues related to Federal upper 
limits).
    Christina Lyon, (410) 786-3332 (for issues related to physician-
administered drugs).
    Bernadette Leeds, (410) 786-9463 (for issues related to the 
regulatory impact analysis).

SUPPLEMENTARY INFORMATION: 
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-2238-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: https://
www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Background

[If you choose to comment on issues in this section, please include the 
caption ``Background'' as the beginning of your comments.]

A. Introduction

    Under the Medicaid program, States may provide coverage of 
outpatient drugs as an optional service under section 1905(a)(12) of 
the Social Security Act (the Act). Section 1903(a) of the Act provides 
for Federal financial participation (FFP) in State expenditures for 
these drugs. In order for payment to be made available under section 
1903 for certain drugs, manufacturers must enter into a Medicaid drug 
rebate agreement as set forth in section 1927(a) of the Act. Section 
1927 of the Act provides specific requirements for rebate agreements, 
drug pricing submission and confidentiality requirements, the formula 
for calculating rebate payments, and requirements for States with 
respect to covered outpatient drugs.
    This proposed rule would implement sections 6001(a)-(d), 6002, and 
6003 of the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171 (Feb. 
8, 2006). It also would codify those parts of section 1927 of the Act 
that pertain to requirements for drug manufacturers' calculation and 
reporting of average

[[Page 77175]]

manufacturer price (AMP) and best price, and it would revise existing 
regulations that set upper payment limits for certain covered 
outpatient drugs. This proposed rule would also implement section 
1903(i)(10) of the Act, as revised by the DRA, with regard to the 
denial of FFP in expenditures for certain physician-administered drugs. 
Finally, the proposed rule would address other provisions of the drug 
rebate program, to the extent those provisions are affected by the DRA.
    The Medicaid Drug Rebate Program was established by section 4401 of 
the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), Pub. L. 101-
508 (Nov. 5, 1990) and subsequently modified by the Veterans Health 
Care Act of 1992 (VHCA), Pub. L. 102-585 (Nov. 4, 1992) and the Omnibus 
Budget Reconciliation Act of 1993, Pub. L. 103-66 (Aug. 10, 1993). 
These provisions were implemented primarily through the national drug 
rebate agreement (56 FR 7049 (Feb. 21, 1991)) and other informal 
program releases, which provide standards for manufacturer reporting 
and rebate calculations. The statutory changes that affect the 
provisions of this proposed rule are described below.

B. Changes Made by the Deficit Reduction Act of 2005

    Section 6001(a) of the DRA amends section 1927(e) of the Act to 
revise the formula CMS uses to set Federal upper limits (FULs) for 
multiple source drugs. Effective January 1, 2007, the upper limit for 
multiple source drugs shall be established at 250 percent of the 
average manufacturer price (AMP) (as computed without regard to 
customary prompt pay discounts extended to wholesalers) for the least 
costly therapeutic equivalent.
    Section 6001(b) of the DRA amends section 1927(b)(3) of the Act to 
create a requirement that manufacturers report certain prices to the 
Secretary monthly. It also requires the Secretary to provide AMP to 
States on a monthly basis beginning July 1, 2006 and post AMP on a Web 
site at least quarterly. We are aware of concerns that the AMPs 
released to the States beginning July 1, 2006, will not reflect changes 
to the definition of AMP made by the DRA and proposed in this rule. 
While we made the AMPs available to the States beginning July 1, 2006, 
States should keep these data confidential in accordance with section 
1927(b)(3)(D) of the Act. Section 6001(b) of the DRA revises these 
confidentiality provisions to permit States to use AMP to calculate 
payment rates; however, these confidentiality amendments are not 
effective until January 1, 2007. This six-month period will give the 
States a chance to review the AMP data and revise their systems to 
address the DRA amendments.
    Section 6001(c) of the DRA modifies the definition of AMP to remove 
customary prompt pay discounts extended to wholesalers from the AMP 
calculation and requires manufacturers to report these customary prompt 
pay discounts to the Secretary. It requires the Inspector General of 
the Department of Health and Human Services (IG) to review the 
requirements for, and the manner in which, AMP is determined and submit 
to the Secretary and Congress any recommendations for changes no later 
than June 1, 2006. Finally, it requires the Secretary to promulgate a 
regulation that clarifies the requirements for, and the manner in 
which, AMP is determined no later than July 1, 2007, taking into 
consideration any IG recommendations.
    Section 6001(d) of the DRA requires manufacturers to report 
information on sales at nominal price to the Secretary for calendar 
quarters beginning on or after January 1, 2007. It also specifies the 
entities to which nominal price applies. It limits the merely nominal 
exclusion to sales at nominal prices to the following: A covered entity 
described in section 340B(a)(4) of the Public Health Service Act 
(PHSA), an intermediate care facility for the mentally retarded (ICF/
MR), a State-owned or operated nursing facility, and any other facility 
or entity that the Secretary determines is a safety net provider to 
which sales of such drugs at a nominal price would be appropriate, 
based on certain factors such as type of facility or entity, services 
provided by the facility or entity, and patient population.
    Section 6001(e) of the DRA amends section 1927 of the Act to 
provide for a survey of retail prices and State performance rankings. 
These provisions are not addressed in this proposed rule.
    Section 6001(f) of the DRA makes minor amendments to section 
1927(g) of the Act which are self-implementing.
    Section 6001(g) of the DRA provides that the amendments in section 
6001 are effective on January 1, 2007, unless otherwise noted.
    Section 6002 of the DRA amends section 1903(i)(10) of the Act by 
prohibiting Medicaid FFP for physician-administered drugs unless States 
submit the utilization data described in section 1927(a) of the Act. It 
also amends section 1927 of the Act to require the submission of 
utilization data for physician-administered drugs.
    Section 6003(a) of the DRA amends section 1927(b)(3)(A) of the Act 
to require manufacturers to include within AMP and best price all of 
its drugs that are sold under a new drug application (NDA) approved 
under section 505(c) of the Federal Food, Drug, and Cosmetic Act 
(FFDCA) when they report AMP and best price to the Secretary.
    Section 6003(b) of the DRA amends section 1927(c)(1)(C) of the Act 
to clarify that manufacturers must include the lowest price available 
to any entity for a drug sold under an NDA approved under section 
505(c) of the FFDCA when determining best price. Section 6003(b) also 
amends section 1927(k) to require that in the case of a manufacturer 
that approves, allows, or otherwise permits any of its drugs to be sold 
under an NDA approved under section 505(c) of the FFDCA, the AMP shall 
be calculated to include the average price paid for such drugs by 
wholesalers for drugs distributed to the retail pharmacy class of 
trade. Section 6003(c) of the DRA provides that the amendments made by 
section 6003 are effective January 1, 2007.
    The statutory provisions in the DRA that affect the Medicaid Drug 
Rebate Program, as well as the regulatory provisions we are proposing 
to implement the program, are discussed in greater detail in the 
section entitled ``Provisions of the Proposed Regulations'' below.

C. Notice of Proposed Rulemaking Published September 19, 1995

    On September 19, 1995, CMS (then the Health Care Financing 
Administration) published a notice of proposed rulemaking (NPRM) in the 
Federal Register (60 FR 48442 (Sept. 19, 1995)). The purpose of the 
1995 NPRM was to propose regulations pertaining to the Medicaid Drug 
Rebate Program and to address the national rebate agreement (56 FR 7049 
(Feb. 21, 1991)). On August 29, 2003, CMS finalized two of the 
provisions in the 1995 NPRM through a final rule with comment period 
(68 FR 51912). These regulations require manufacturers to retain 
records for data used to calculate AMP and best price for three years 
from when AMP and best price are reported to CMS. We also provided that 
manufacturers should report revisions to AMP and best price for a 
period not to exceed twelve quarters from the quarter in which the data 
are due. On November 26, 2004, we published final regulations (69 FR 
68815) that require a manufacturer to retain pricing data for 10 years 
from the date the manufacturer reports that data to CMS and for an 
additional time frame where the manufacturer is the subject of an audit 
or government investigation. Due to the time that has elapsed since 
publication of the 1995 NPRM and

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changes in the prescription drug industry, we do not plan to finalize 
the other provisions of that proposed rule, and any comments on the 
1995 NPRM are outside the scope of this proposed rule. This proposed 
rule does not address the entire Medicaid Drug Rebate Program, but 
focuses primarily on the provisions of the DRA that address the 
Medicaid Drug Rebate Program.

II. Provisions of the Proposed Regulations

Basis and Purpose of Subpart I--Section 447.500

    This subpart would implement specified provisions of sections 1927, 
1903(i)(10), and 1902(a)(54) of the Act related to implementation of 
the DRA. It would include requirements related to State plans, FFP for 
drugs, and the payment for covered outpatient drugs under Medicaid. In 
this rule, we also propose to move the existing Medicaid drug 
provisions in the Federal regulations from subpart F to subpart I of 42 
CFR part 447.

Definitions--Section 447.502

    This section of the rule would include definitions of key terms 
used in 42 CFR part 447, subpart I. We propose to use definitions from 
several sources, including the Act, Federal regulations, program 
guidance, and the national rebate agreement. We invite the public to 
provide comments on the terms we have chosen to define as well as the 
proposed definitions described below.
    Bona fide service fee would mean a fee paid by a manufacturer to an 
entity, that represents fair market value for a bona fide, itemized 
service actually performed on behalf of the manufacturer that a 
manufacturer would otherwise perform (or contract for) in the absence 
of the service arrangement, and that is not passed in whole or in part 
to a client or customer of an entity, whether or not the entity takes 
title to the drug.
    Brand name drug would mean a single source or innovator multiple 
source drug.
    Bundled sale would mean an arrangement regardless of physical 
packaging under which the rebate, discount, or other price concession 
is conditioned upon the purchase of the same drug or drugs of different 
types (that is, at the nine-digit National Drug Code (NDC) level) or 
some other performance requirement (e.g., the achievement of market 
share, inclusion or tier placement on a formulary), or where the 
resulting discounts or other price concessions are greater than those 
which would have been available had the bundled drugs been purchased 
separately or outside the bundled arrangement. For bundled sales, the 
discounts are allocated proportionately to the dollar value of the 
units of each drug sold under the bundled arrangement. For bundled 
sales where multiple drugs are discounted, the aggregate value of all 
the discounts should be proportionately allocated across all the drugs 
in the bundle.
    Consumer Price Index `` Urban (CPI-U) would be defined the same as 
it is in the national rebate agreement, except we would replace ``U.S. 
Department of Commerce'' with ``U.S. Department of Labor'' to reflect 
that the Department of Labor is now responsible for updating the CPI-U. 
Therefore, the term CPI-U would mean the index of consumer prices 
developed and updated by the U.S. Department of Labor. For purposes of 
this subpart, it would be the CPI for all urban consumers (U.S. 
average) for the month before the beginning of the calendar quarter for 
which the rebate is paid.
    Dispensing fee would be defined similarly to how it is defined for 
the Medicare Part D program in 42 CFR 423.100 in light of some of the 
parallels of Part D to Medicaid. We are defining this term in order to 
assist States in their evaluation of factors in establishing a 
reasonable dispensing fee to pharmacy providers. We note that while we 
propose to define this term, we do not intend to mandate a specific 
formula or methodology which the States must use to determine the 
dispensing fee. The formula is consistent with our regulation that 
defines estimated acquisition costs which give States flexibility to 
determine EAC. However, consistent with a recommendation made by the 
Office of the Inspector General (OIG) in its report, ``Determining 
Average Manufacturer Prices for Prescription Drugs under the Deficit 
Reduction Act of 2005,'' (A-06-06-00063) May 2006, we encourage States 
to analyze the relationship between AMP and pharmacy acquisition costs 
to ensure that the Medicaid program appropriately reimburses pharmacies 
for estimated acquisition costs.
    Dispensing fee would be defined as the fee which--
    (1) Is incurred at the point of sale and pays for costs other than 
the ingredient cost of a covered outpatient drug each time a covered 
outpatient drug is dispensed;
    (2) Includes only pharmacy costs associated with ensuring that 
possession of the appropriate covered outpatient drug is transferred to 
a Medicaid beneficiary. Pharmacy costs include, but are not limited to, 
any reasonable costs associated with a pharmacist's time in checking 
the computer for information about an individual's coverage, performing 
drug utilization review and preferred drug list review activities, 
measurement or mixing of the covered outpatient drug, filling the 
container, beneficiary counseling, physically providing the completed 
prescription to the Medicaid beneficiary, delivery, special packaging, 
and overhead associated with maintaining the facility and equipment 
necessary to operate the pharmacy; and
    (3) Does not include administrative costs incurred by the State in 
the operation of the covered outpatient drug benefit including systems 
costs for interfacing with pharmacies.
    Innovator multiple source drug would be defined based on the 
definition in section 1927(k)(7)(A)(ii) of the Act. We would also use 
the definition from the national rebate agreement. Innovator multiple 
source drug would mean a multiple source drug that was originally 
marketed under an original NDA approved by the Food and Drug 
Administration (FDA). It would include a drug product marketed by any 
cross-licensed producers or distributors operating under the NDA and a 
covered outpatient drug approved under an NDA, Product License 
Approval, Establishment License Approval or Antibiotic Drug approval. 
We believe this definition is consistent with our understanding of the 
drug rebate statute and section 6003 of the DRA which includes within 
the definition those drugs which often receive a certain amount of 
patent protection and/or market exclusivity.
    Manufacturer would be defined based on the definition in section 
1927(k)(5) of the Act and the national rebate agreement. It would also 
mirror the current definition of manufacturer used by Medicare in the 
regulations regarding manufacturer's average sales price (ASP) data. 
For purposes of the Medicaid program, manufacturer would be defined as 
any entity that possesses legal title to the NDC for a covered drug or 
biological product and--
    (a) Is engaged in the production, preparation, propagation, 
compounding, conversion, or processing of covered outpatient drug 
products, either directly or indirectly by extraction from substances 
of natural origin, or independently by means of chemical synthesis, or 
by a combination of extraction and chemical synthesis; or
    (b) Is engaged in the packaging, repackaging, labeling, relabeling, 
or distribution of covered outpatient drug products and is not a 
wholesaler of drugs or a retail pharmacy licensed under State law.

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    (c) With respect to authorized generic products, the term 
``manufacturer'' will also include the original holder of the NDA.
    (d) With respect to drugs subject to private labeling arrangements, 
the term ``manufacturer'' will also include those entities that do not 
possess legal title to the NDC.
    Multiple source drug is currently defined in Federal regulations at 
section 42 CFR 447.301. We propose removing the definition from that 
section and revising the definition to reflect the DRA amendments to 
section 1927 of the Act. We would define the term multiple source drug 
to mean, with respect to a rebate period, a covered outpatient drug for 
which there is at least one other drug product which--
    (1) Is rated as therapeutically equivalent. For the list of drug 
products rated as therapeutically equivalent, see the FDA's most recent 
publication of ``Approved Drug Products with Therapeutic Equivalence 
Evaluations'' which is available at https://www.fda.gov/cder/orange/
default.htm or can be viewed at the FDA's Freedom of Information Public 
Reading Room at 5600 Fishers Lane, rm. 12A-30, Rockville, MD 20857;
    (2) Is pharmaceutically equivalent and bioequivalent, as determined 
by the FDA; and
    (3) Is sold or marketed in the United States during the rebate 
period.
    National drug code (NDC) would be defined as it is used by the FDA 
and based on the definition used in the national rebate agreement. For 
purposes of this subpart, it would mean the 11-digit numerical code 
maintained by the FDA that indicates the labeler, product, and package 
size, unless otherwise specified in the regulation as being without 
respect to package size (9-digit numerical code).
    National rebate agreement is described in section 1927 of the Act. 
Section 1927(b) of the Act outlines the terms of the rebate agreement, 
including reporting timeframes, manufacturer responsibilities, 
penalties, and confidentiality of pricing data. We propose that the 
national rebate agreement would continue to be defined as the rebate 
agreement developed by CMS and entered into by CMS on behalf of the 
Secretary or his designee and a manufacturer to implement section 1927 
of the Act.
    Nominal price would be defined as it is in the national rebate 
agreement. We propose incorporating this definition in this rule 
because it is the standard presently used in the Medicaid program and 
the Medicare Part B program, and is similar to that used by the 
Department of Veterans Affairs (DVA) in administering the Federal 
Supply Schedule (FSS). Nominal price would mean a price that is less 
than 10 percent of AMP in the same quarter for which the AMP is 
computed.
    Rebate period is defined in section 1927(k)(8) of the Act as a 
calendar quarter or other period specified by the Secretary with 
respect to the payment of rebates under the national rebate agreement. 
The Medicaid Drug Rebate Program currently operates using a calendar 
quarter for the rebate period. While AMPs would be reported monthly for 
purposes of calculating FULs and for release to States, we can find no 
evidence in the legislative history of the DRA that Congress intended 
to change the definition of rebate period. Therefore, we would define 
rebate period as a calendar quarter.
    Single source drug is defined in section 1927(k)(7)(A)(iv) of the 
Act as a covered outpatient drug which is produced or distributed under 
an original NDA approved by the FDA, including a drug product marketed 
by any cross-licensed producers or distributors operating under the 
NDA. It is further defined in the national rebate agreement as a 
covered outpatient drug approved under a Product License Approval, 
Establishment License Approval, or Antibiotic Drug Approval. We propose 
to define the term single source drug as it is defined in the statute 
and the national rebate agreement.

Determination of Average Manufacturer Price--Section 447.504

Background
    Prior to the DRA, section 1927(k)(1) of the Act specified that the 
AMP with respect to a covered outpatient drug of a manufacturer for a 
rebate period is the average unit price paid to the manufacturer for 
the drug in the United States by wholesalers for drugs distributed to 
the retail pharmacy class of trade after deducting customary prompt pay 
discounts.
    The national rebate agreement (56 FR 7049 (Feb. 21, 1991)) further 
specifies that:
     Direct sales to hospitals, health maintenance 
organizations (HMOs) and wholesalers, where the drug is relabeled under 
that distributor's national drug code number, and FSS prices are not 
included in the calculation of AMP;
     AMP includes cash discounts and all other price reductions 
(other than rebates under section 1927 of the Act), which reduce the 
actual price paid;
     AMP is calculated as net sales divided by the number of 
units sold, excluding free goods (i.e., drugs or any other items given 
away, but not contingent on any purchase requirements), and
     Net sales means quarterly gross sales revenue less cash 
discounts allowed and all other price reductions (other than rebates 
under section 1927 of the Act) which reduce the actual price paid.
    Consistent with these provisions, it has been our policy that in 
order to provide a reflection of market transactions, the AMP for a 
quarter should be adjusted by the manufacturer if cumulative discounts 
or other arrangements subsequently adjust the prices actually realized.
    AMP should be adjusted for bundled sales (as defined above) by 
determining the total value of all the discounts on all drugs in the 
bundle and allocating those discounts proportionately to the respective 
AMP calculations. The aggregate discount is allocated proportionately 
to the dollar value of the units of each drug sold under the bundled 
arrangement. Where discounts are offered on multiple products in a 
bundle, the aggregate value of all the discounts should be 
proportionately allocated across all the drugs in the bundle. The 
average unit price means a manufacturer's quarterly sales included in 
AMP less all required adjustments divided by the total units sold and 
included in AMP by the manufacturer in a quarter.

Provisions of the DRA

    Section 6001(c)(1) of the DRA amended section 1927(k)(1) of the Act 
to revise the definition of AMP to exclude customary prompt pay 
discounts to wholesalers, effective January 1, 2007. Section 6001(c)(3) 
of the DRA requires the OIG to review the requirements for and manner 
in which AMPs are determined and recommend changes to the Secretary by 
June 1, 2006. Section 6001(c)(3) of the DRA requires the Secretary to 
clarify the requirements for and the manner in which AMPs are 
determined by promulgating a regulation no later than July 1, 2007, 
taking into consideration the OIG's recommendations.

OIG Recommendations on AMP

    In accordance with 6001(c)(3) of the DRA, the OIG issued its 
report, ``Determining Average Manufacturer Prices for Prescription 
Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-00063), in 
May 2006. In this report, the OIG recommended that CMS:
     Clarify the requirements in regard to the definition of 
retail pharmacy class of trade and treatment of pharmacy

[[Page 77178]]

benefit manager (PBM) rebates and Medicaid sales and
     Consider addressing issues raised by industry groups, such 
as:
    [ctrcir] Administrative and service fees,
    [ctrcir] Lagged price concessions and returned goods,
    [ctrcir] The frequency of AMP reporting,
    [ctrcir] AMP restatements, and
    [ctrcir] Base date AMP.
    The OIG also recommended that the Secretary direct CMS to:
     Issue guidance in the near future that specifically 
addresses the implementation of the AMP-related reimbursement 
provisions of the DRA and
     Encourage States to analyze the relationship between AMP 
and pharmacy acquisition cost to ensure that the Medicaid program 
appropriately reimburses pharmacies for estimated acquisition costs.
    We address these recommendations as we discuss provisions of this 
proposed rule in the section below.

Definition of Retail Pharmacy Class of Trade and Determination of AMP

    We recognize that there have been concerns expressed regarding AMP 
because of inconsistencies in the way manufacturers determine AMP, 
changes in the drug marketplace, and the introduction of newer business 
practices such as payment of services fees. We also realize that in 
light of the DRA amendments, AMP will serve two distinct purposes: For 
drug rebate liability and for payments. For the purpose of determining 
drug rebate liability, drug manufacturers would generally benefit from 
a broad definition of retail pharmacy class of trade which would 
include entities that purchase drugs at lower prices and which would 
lower rebate liability. Including these lower prices would decrease the 
AMP, decreasing manufacturers' rebate liability. The retail pharmacy 
industry might benefit from a narrow definition of retail pharmacy 
prices that would be limited to certain higher priced sales given that, 
in light of the DRA amendments, States might use AMP to calculate 
pharmacy payment rates. Excluding low-priced sales would increase AMP, 
increasing, in all likelihood, manufacturers' rebate payments. The 
pharmacy industry believes that mail order pharmacies and nursing home 
pharmacies (long-term care pharmacies) pay less for drugs than retail 
pharmacies (e.g., independents and chain pharmacies), and thus the 
inclusion of such prices would lower AMP below the price paid by such 
retail pharmacies.
    The statute mandates that, effective January 1, 2007, the Secretary 
use AMP when computing FULs. For this purpose, we would exclude certain 
outlier payments (see our discussion in the FULs section for a more 
complete description of outlier exclusions). The statute also requires 
that AMP be provided to States monthly and be posted on a public Web 
site. While there is no requirement that States use AMPs to set payment 
amounts, we believe the Congress intended that States have drug pricing 
data based on actual prices, in contrast to previously available data 
that did not necessarily reflect actual manufacturer prices of sales to 
the retail pharmacy class of trade. We considered several options to 
define what prices should be included in AMP. We considered including 
only prices of sales to retail pharmacies that dispense drugs to the 
general public (e.g., independent and chain pharmacies) in retail 
pharmacy class of trade and removing prices to mail order pharmacies, 
nursing home pharmacies (long-term care pharmacies), and PBMs. This 
definition would address the retail pharmacy industry's contentions 
that an AMP used for reimbursement to retail pharmacies should only 
reflect prices of sales to those pharmacies which dispense drugs to the 
general public.
    The exclusion of prices to mail order pharmacies, nursing home 
facilities (long-term care facilities), and PBMs would substantially 
reduce the number of transactions included in AMP. Removal of these 
prices would simplify AMP calculations for manufacturers because it is 
our understanding that certain data (e.g., PBM pricing data) are 
difficult for manufacturers to capture. In addition, removal of these 
prices would address differing interpretations of CMS policy identified 
by the OIG and the Government Accountability Office (GAO) due to the 
lack of a clear definition of AMP or specific guidance regarding which 
retail prices should be included in AMP. However, such a removal would 
not be consistent with past policy, as specified in manufacturer 
Releases 28 and 29 (https://www.cms.hhs.gov/MedicaidDrugRebateProgram/
03_DrugMfrReleases.asp#TopOfPage), would likely result in a higher 
AMP, and would result in an increase in drug manufacturers' rebate 
liabilities.
    We also considered not revising the entities included in the retail 
pharmacy class of trade. However, this would not address the issues 
identified by the OIG in its report, ``Medicaid Drug Rebates: The 
Health Care Financing Administration Needs to Provide Additional 
Guidance to Drug Manufacturers to Better Implement the Program,'' (A-
06-91-00092), November 1992 and GAO in its report ``Medicaid Drug 
Rebate Program--Inadequate Oversight Raises Concerns about Rebates Paid 
to States,'' (GAO-05-102), February 2005.
    We believe, based in part on the OIG and GAO reports, that retail 
pharmacy class of trade means that sector of the drug marketplace, 
similar to the marketplace for other goods and services, which 
dispenses drugs to the general public and which includes all price 
concessions related to such goods and services. As such, we would 
exclude from AMP the prices of sales to nursing home pharmacies (long-
term care pharmacies) because nursing home pharmacies do not dispense 
to the general public. We would include in AMP the prices of sales and 
discounts to mail order pharmacies. We considered limiting mail order 
pharmacy prices to only those prices that are offered to all pharmacies 
under similar terms and conditions. However, given our belief that such 
prices are simply another form of how drugs enter into the retail 
pharmacy class of trade, we have decided to maintain these prices in 
the definition. We note that even were we to incorporate this change, 
retail pharmacies may not be able to meet the terms and conditions 
placed on mail order pharmacies to be eligible for some manufacturer 
price concessions. CMS seeks public comment on the inclusion of all 
mail order pharmacy prices in our definition of retail pharmacy class 
of trade for purposes of inclusion in the determination of AMP.
    We recognize that a major factor contributing to the determination 
of AMP is the treatment of PBMs. These entities have assumed a 
significant role in drug distribution since the enactment of the 
Medicaid Drug Rebate Program in 1990. We are considering how PBM 
rebates, discounts, or other price concessions should be recognized for 
purposes of AMP calculations.
    A GAO report ``Medicaid Drug Rebate Program--Inadequate Oversight 
Raises Concerns about Rebates Paid to States,'' (GAO-05-102), in 
February 2005, indicated that the Medicaid Drug Rebate Program does not 
clearly address certain financial concessions negotiated by PBMs. The 
GAO recommended that we issue clear guidance on manufacturer price 
determination methods and the definitions of AMP and best price, and 
update such guidance as additional issues arise.
    The issue regarding PBMs was also addressed in the recently issued 
OIG report, ``Determining Average

[[Page 77179]]

Manufacturer Prices for Prescription Drugs under the Deficit Reduction 
Act of 2005,'' (A-06-06-00063), in May 2006. In this report, the OIG 
recommended that we clarify the treatment of PBM rebates. This report 
says that manufacturers treat rebates and fees paid to PBMs in the 
calculation of AMP in three different ways. Specifically they found 
that manufacturers (1) did not subtract rebates or fees paid to PBMs 
from the AMP calculation; (2) subtracted the rebates or fees paid to 
PBMs; or (3) subtracted a portion of the PBMs rebates or fees from the 
AMP calculation.
    In developing this proposed rule, we considered including all 
rebates, discounts and other price concessions from PBMs in the 
determination of AMP. We also considered excluding rebates, discounts 
and other price concessions from PBMs in the determination of AMP.
    One of the most difficult issues with PBM discounts, rebates, or 
other price concessions is that manufacturers contend that they do not 
know what part of these discounts, rebates, or other price concessions 
is kept by the PBM for the cost of its activities and profit, what part 
is passed on to the health insurer or other insurer or other entity 
with which the PBM contracts, and what part, if any, that entity passes 
on to pharmacies. Despite the difficulties of including certain PBM 
rebates, discounts or other price concessions in AMP, excluding all of 
these price concessions could result in an artificial inflation of AMP. 
For this reason, we propose to include PBM rebates, discounts, or other 
price concessions for drugs provided to the retail pharmacy class of 
trade for the purpose of determining AMP; however, we invite comments 
on whether this proposal is operationally feasible.
    As discussed more fully below, we have proposed that PBM rebates 
and price concessions that adjust the amount received by the 
manufacturer for drugs distributed to the retail pharmacy class of 
trade should be included in the calculation of AMP. We acknowledge that 
manufacturers have a variety of arrangements with PBMs and thus invite 
comments on all aspects of our proposal as explained below.
    The rebate agreement defines AMP to include cash discounts and all 
other price reductions (other than rebates under section 1927 of the 
Act), which reduce the actual price paid to the manufacturer for drugs 
distributed to the retail pharmacy class of trade. As noted in Release 
28 and reiterated in Release 29, manufacturers have developed a myriad 
of arrangements whereby specific discounts, chargebacks, or rebates are 
provided to PBMs which, in turn, are passed on to the purchaser. Those 
releases recognize that certain prices provided by manufacturers to 
PBMs should be included within AMP calculations. In accordance with 
those releases, our position has been that PBMs have no effect on the 
AMP calculations unless the PBM is acting as a wholesaler as defined in 
the rebate agreement. We are concerned, however, that this position may 
unduly exclude from AMP certain PBM prices and discounts which have an 
impact on prices paid to the manufacturer.
    We believe that AMP should be calculated to reflect the net drug 
price recognized by the manufacturer, inclusive of any price 
adjustments or discounts provided directly or indirectly by the 
manufacturer. We are interested in comments on this proposal, including 
the comments on the operational difficulties of including such PBM 
arrangements within AMP calculations.
    We recognize that the statute defines AMP as the average price paid 
to the manufacturer by wholesalers for drugs distributed to the retail 
pharmacy class of trade; however, in light of our understanding of 
congressional intent, we believe that the definition is meant to 
capture discounts and other price adjustments, regardless of whether 
such discounts or adjustments are provided directly or indirectly by 
the manufacturer. We invite comments on this definition and whether AMP 
should be calculated to include all adjustments that affect net drug 
prices.
    We acknowledge that there are many PBM/manufacturer arrangements. 
To the extent manufacturers are offering rebates, discounts, or other 
price concessions to the PBM that are not bona fide service fees, we 
propose that these lower prices should be included in the AMP 
calculations. We request comments on the operational difficulties of 
tracking these rebates, discounts, or chargebacks provided to a PBM for 
purposes of calculating AMP and on the inclusion of all such price 
concessions in AMP. Specifically, we solicit comments on the extent to 
which CMS should or should not define in regulation which rebates, 
discounts, or price concessions provided to PBMs should be included in 
AMP and how best to measure these. Also, we solicit public comment on 
how these PBM price concessions should be reported to CMS to assure 
that appropriate price adjustments are captured and included in the 
determination of AMP.
    Finally, we request comments on any other issues that we should 
take into account in making our final decisions. These include, but may 
not be limited to, possible Federal and State budgetary impacts (our 
savings estimates assumed no budgetary impacts as generic drugs are 
rarely, if ever, subject to PBM price adjustments in this context); 
possible future evolution in industry pricing and management practices 
(e.g., growth of ``preferred'' generic drugs); and possible impacts on 
reimbursement for brand name drugs under Medicaid. We are generally 
interested in comments on how and to what extent PBMs act as 
``wholesalers.'' We propose to incorporate the explicitly listed 
exclusions in section 1927 of the Act, and in the national rebate 
agreement, which are direct sales to hospitals, HMOs/managed care 
organizations (MCOs), wholesalers where the drug is relabeled under 
that distributor's NDC and FSS prices.
    The specific terms we propose to clarify and the proposed 
clarifications follow.
    Retail Pharmacy Class of Trade: We propose to include in the 
definition of retail pharmacy class of trade any entity that purchases 
prescription drugs from a manufacturer or wholesaler for dispensing to 
the general public (e.g., retail, independent, chain and mail order 
pharmacies), except as otherwise specified by the statute or regulation 
(such as, HMOs, hospitals).
    PBM Price Concessions: We proposed to include any rebates, 
discounts or other price adjustments provided by the manufacturer to 
the PBM that affect the net price recognized by the manufacturer for 
drugs provided to entities in the retail pharmacy class of trade.
    Customary Prompt Pay Discounts: Prior to the DRA, neither the 
statute nor the national rebate agreement defined customary prompt pay 
discounts. The DRA revises the definition of AMP to exclude customary 
prompt pay discounts extended to wholesalers; however, it does not 
revise or define customary prompt pay discounts. We propose to define 
customary prompt pay discounts as any discount off the purchase price 
of a drug routinely offered by the manufacturer to a wholesaler for 
prompt payment of purchased drugs within a specified time of the 
payment due date.
    Treatment of Medicaid Sales: The OIG recommended that we should 
address whether AMP should include Medicaid prices of sales; i.e., 
prices of sales where the end payer for the drug is the Medicaid 
program. In its May 2006 report, the OIG noted confusion on this

[[Page 77180]]

issue and recommended that we clarify that these prices of sales are to 
be included in AMP. It is our position that these sales are included in 
AMP because they are not expressly excluded in the statute. In this 
proposed rule, we would also clarify that prices to State Children's 
Health Insurance Program Title XIX (SCHIP) through an expanded Medicaid 
program are covered under the provisions of section 1927 of the Act and 
generally subsumed in Medicaid sales. As a general matter, Medicaid 
does not directly purchase drugs from manufacturers or wholesalers but 
instead reimburses pharmacies for these drugs. Therefore, Medicaid 
sales are determined by the entities that are actually in the sales 
chain and because Medicaid reimburses pharmacies for drugs for Medicaid 
beneficiaries, integrated into the chain of sales otherwise included in 
AMP.
    In this proposed rule, we would clarify that the units associated 
with Medicaid sales should be included as part of the total units in 
the AMP calculation. We have proposed that AMP be calculated to include 
all sales and associated discounts and other price concessions provided 
by the manufacturer for drugs distributed to the retail pharmacy class 
of trade unless the sale, discount, or other price concession is 
specifically excluded by the statute or regulation or is provided to an 
entity excluded by statute or regulation. Therefore, we would clarify 
that rebates paid to States under the Medicaid Drug Rebate Program 
should be excluded from AMP calculations but that price concessions 
associated with the sales of drugs in the retail pharmacy class of 
trade which are provided to Medicaid patients should be included.
    In this proposed rule, we also propose to clarify how the prices of 
sales to State Children's Health Insurance Program Title XXI (SCHIP) 
non-Medicaid expansion programs should be treated. Like the Medicaid 
program, SCHIP non-Medicaid expansion programs do not directly purchase 
drugs. Because such programs are not part of the Medicaid program, they 
are not covered under the provisions of section 1927 of the Act. As 
with Medicaid sales, these sales are included in AMP to the extent they 
concern sales at the retail pharmacy class of trade. Therefore, these 
sales should not be backed out of the AMP calculation to the extent 
that such sales are included within sales provided to the retail 
pharmacy class of trade. Rebates and units associated with those sales 
should also be included in the calculation of AMP.
    Treatment of Medicare Part D sales: We would clarify that the 
treatment of prices of sales through a Medicare Part D prescription 
drug plan (PDP), a Medicare Advantage prescription drug plan (MA-PD), 
or a qualified retiree prescription drug plan for covered Part D drugs 
provided on behalf of Part D eligible individuals should be included in 
the AMP calculation. Like the Medicaid program, PDPs and MA-PDs do not 
directly purchase drugs, but are usually third party payers. As with 
Medicaid sales, these sales are included in AMP to the extent they are 
sales to the retail pharmacy class of trade. Therefore, we believe 
these prices of sales should not be backed out of the AMP. Rebates paid 
by the manufacturer to the PDP or MA-PD should be included in the 
calculation of AMP.
    SPAP price concessions: In this proposed rule, we also propose to 
clarify how the prices to State pharmaceutical assistance programs 
(SPAPs) should be treated. Like the Medicaid program, PDPs, and MA-PDs, 
SPAPs do not directly purchase drugs, but are generally third-party 
payers. As with Medicaid sales, these sales are included in AMP to the 
extent the sales are to an entity included in the retail pharmacy class 
of trade. Therefore, we propose that SPAP sales should not be backed 
out of the AMP calculation. Rebates paid by the manufacturer to the 
SPAP should be included in the calculation of AMP.
    Prices to other Federal Programs: We propose that any prices on or 
after October 1, 1992, to the IHS, the DVA, a State home receiving 
funds under section 1741 of title 38, United States Code, the 
Department of Defense (DoD), the Public Health Service (PHS), or a 
covered entity described in subsection 1927(a)(5)(B) of the Act 
(including inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the 
GSA; and any depot prices (including Tricare) and single award contract 
prices, as defined by the Secretary, of any agency of the Federal 
government are excluded from the calculation of AMP. We propose that 
the prices to these entities should be excluded from AMP because the 
prices to these entities are not available to the retail pharmacy class 
of trade.
    Administrative and Service Fees: Current Medicaid drug rebate 
policy is that administrative fees which include service fees and 
distribution fees, incentives, promotional fees, chargebacks and all 
discounts or rebates, other than rebates under the Medicaid drug 
program, should be included in the calculation of AMP, if those sales 
are to an entity included in the calculation of AMP. The OIG has noted 
in its report, ``Determining Average Manufacturer Prices for 
Prescription Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-
00063), May 2006, that confusion exists about the treatment of fees, 
such as service fees negotiated between a manufacturer and 
pharmaceutical distributor. Some believe that these fees should not be 
included in AMP because the manufacturer does not know if the fees act 
to reduce the price paid by the end purchasers. Others believe such 
fees should be included in the calculation, which would reduce AMP 
because they serve as a price concession. For the same reason as for 
sales to PBMs, we propose that all fees except fees paid for bona fide 
services should be included in AMP. We propose that bona fide service 
fees means fees paid by a manufacturer to an entity, which represent 
fair market value for a bona fide, itemized service actually performed 
on behalf of the manufacturer that the manufacturer would otherwise 
perform (or contract for) in the absence of the service arrangement, 
and which are not passed in whole or in part to a client or customer of 
an entity, whether or not the entity takes title to the drug. Medicare 
Part B also adopted this definition in its final rule with comment 
period that was published on December 1, 2006 (71 FR 69623-70251) that 
implemented the ASP provisions enacted in the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (MMA). We are not 
proposing to define fair market value. However, CMS invites comments 
from the public regarding an appropriate definition for fair market 
value.
    Direct Patient Sales: In response to manufacturers' questions, CMS 
has stated previously that covered outpatient drugs sold to patients 
through direct programs should be included in the calculation of AMP. 
These sales are usually for specialty drugs through a direct 
distribution arrangement, where the manufacturer retains ownership of 
the drug and pays either an administrative or service fee to a third 
party for functions such as the storage, delivery and billing of the 
drug. Some manufacturers have contended that direct patient sales for 
covered outpatient drugs sold by a manufacturer through a direct 
distribution channel should not qualify for inclusion in the 
calculation of AMP because the Medicaid rebate statute and the national 
rebate agreement do not address covered outpatient drugs that are not 
sold to wholesalers and/or not distributed in the retail pharmacy class 
of trade. We believe that the distributor is acting as

[[Page 77181]]

a wholesaler and these sales are to the retail pharmacy class of trade. 
In light of this, we propose in this regulation that these sales and 
the rebates associated with these sales to patients through direct 
programs would be included in AMP. CMS invites comments from the public 
on this proposed policy.
    Returned Goods: Current Medicaid Drug Rebate Program policy is that 
returned goods are credited back to the manufacturer in either the 
quarter of sale or quarter of receipt. This has caused difficulty for 
some manufacturers when these returns have substantially reduced AMP in 
a quarter or resulted in a negative AMP. In light of these concerns, we 
propose to exclude returned goods from the calculation of AMP when 
returned in good faith. CMS considers that goods are being returned in 
good faith when they are being returned pursuant to manufacturer 
policies which are not designed to manipulate or artificially inflate 
or deflate AMP. The Medicare Part B program excludes returned goods 
from the calculation of ASP. The exclusion of returned goods will allow 
the manufacturer to calculate and report an AMP that is more reflective 
of its true pricing policies to the retail pharmacy class of trade in 
the reporting period. It lessens the administrative burden and problems 
associated with allocating the returned goods back to the reporting 
period in which they were sold, as well as eliminating artificially 
low, zero or negative AMPs that may result from these adjustments.
    Manufacturer Coupons: In this proposed rule, we propose to clarify 
how manufacturer coupons should be treated. The treatment of 
manufacturer coupons has been problematic for CMS as well as some 
manufacturers. In this rule, we propose to include coupons redeemed by 
any entity other than the consumer in the calculation of AMP. We 
believe that the redemption of coupons by the consumer directly to the 
manufacturer is not included in the retail pharmacy class of trade. In 
this proposed rule, we propose to exclude coupons redeemed by the 
consumer directly to the manufacturer from the calculation of AMP. CMS 
invites comments from the public on this proposed policy.
    Future Clarifications of AMP: Based on past comments from the GAO 
and the OIG and recommendations of the OIG in its May 2006 report on 
AMP, we believe that we need to have the ability to clarify the 
definition of AMP in an expedited manner in order to address the 
evolving marketplace for the sale of drugs. We plan to address future 
clarifications of AMP through the issuance of program releases and by 
posting the clarifications on the CMS Web site as needed.

Requirements for Average Manufacturer Price

    To implement the provisions set forth in sections 6001 and 6003 of 
the DRA related to AMP, we propose a new Sec.  447.504. In Sec.  
447.504(a), we propose a revised definition of AMP and clarify that AMP 
is determined without regard to customary prompt pay discounts extended 
to wholesalers. In Sec.  447.504(b), we propose to define average unit 
price. In Sec.  447.504(c), we propose to define customary prompt pay 
discount. In Sec.  447.504(d), we propose to define net sales. In Sec.  
447.504(e), we propose to define retail pharmacy class of trade. In 
Sec.  447.504(f), we propose to define wholesaler. In Sec.  447.504(g), 
we would describe in detail the sales, rebates, discounts, or other 
price concessions that must be included in AMP. In Sec.  447.504(h), we 
would describe the sales, rebates, discounts, or other price 
concessions that must be excluded from AMP. In Sec.  447.504(i), we 
would provide further clarification about how manufacturers should 
account for price reductions and other pricing arrangements which 
should be included in the calculation of AMP.

Determination of Best Price--Section 447.505

    Prior to the DRA, section 1927(c)(1)(C) of the Act provided that 
manufacturers must include in their best price calculation, for a 
single source or innovator multiple source drug, the lowest price 
available from the manufacturers during the rebate period to any 
wholesaler, retailer, provider, HMO, non-profit entity, or governmental 
entity within the United States except for those entities specifically 
excluded by statute. Excluded from best price are prices charged on or 
after October 1, 1992, to the IHS, the DVA, a State home receiving 
funds under section 1741 of title 38, United States Code, the DoD, the 
PHS, or a covered entity described in section 1927(a)(5)(B) of the Act 
(including inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the 
GSA; any prices used under an SPAP; any depot prices (including 
Tricare) and single award contract prices, as defined by the Secretary, 
of any agency of the Federal Government; and prices to a Medicare Part 
D PDP, an MA-PD, or a qualified retiree prescription drug plan for 
covered Part D drugs provided on behalf of Part D eligible individuals.
    The statute further specifies that:
     Best price includes cash discounts, free goods that are 
contingent on any purchase requirement, volume discounts and rebates 
(other than rebates under section 1927 of the Act), which reduce the 
price paid;
     Best price must be determined on a unit basis without 
regard to special packaging, labeling or identifiers on the dosage form 
or product or package;
     Best price must not take into account prices that are 
merely nominal in amount.
    Consistent with these provisions and the national rebate agreement, 
it has been our policy that in order to reflect market transactions, 
the best price for a rebate period should be adjusted by the 
manufacturer if cumulative discounts or other arrangements subsequently 
adjust the prices actually realized.
    Best price should be adjusted for any bundled sale. The drugs in a 
``bundle'' do not have to be physically packaged together to constitute 
a ``bundle,'' just part of the same bundled transaction.
    Section 1927(c)(1)(C)(ii)(I) of the Act specifies that best price 
must include free goods that are contingent on any purchase 
requirement. Thus, only those free goods that are not contingent on any 
purchase requirements may be excluded from best price.
    Section 103(e) of the MMA modified the definition of best price by 
excluding prices which are negotiated by a PDP under part D of title 
XVIII of the Act, by any MA-PD plan under part C of such title with 
respect to covered part D drugs, or by a qualified retiree prescription 
drug plan (as defined in section 1860D-22(a)(2) of the Act) with 
respect to such drugs on behalf of individuals entitled to benefits 
under part A or enrolled under part B of such title. Section 1002(a) of 
the MMA modified section 1927(c)(1)(C)(i)(I) of the Act by clarifying 
that inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA are exempt from best price.
    Section 6003 of the DRA amended section 1927(c)(1)(C) of the Act by 
revising the definition of best price to clarify that the best price 
includes the lowest price available to any entity for any such drug of 
a manufacturer that is sold under an NDA approved under section 505(c) 
of the FFDCA.
    In accordance with our understanding of congressional intent, in 
this proposed rule we propose to define best price with respect to a 
single source drug or innovator multiple source drug of a manufacturer, 
including any drug sold under an NDA approved under section

[[Page 77182]]

505(c) of the FFDCA, as the lowest price available from the 
manufacturer during the rebate period to any entity in the United 
States in any pricing structure (including capitated payments) in the 
same quarter for which the AMP is computed. It continues to be our 
policy that best price reflects the lowest price at which the 
manufacturer sells a covered outpatient drug to any purchaser, except 
those prices specifically exempted by law. We propose to define 
provider as a hospital; HMO, including an MCO or PBM; or other entity 
that treats individuals for illnesses or injuries or provides services 
or items in the provisions of health care.
    As with the determination of AMP, the DRA does not establish a 
mechanism to clarify how best price is to be determined should new 
entities be formed after this regulation takes effect. We believe that 
we need to have the ability to clarify best price in an expedited 
manner in order to address the evolving marketplace for the sale of 
drugs. We plan to address future clarifications to best price through 
the issuance of program releases and by posting the clarifications on 
the CMS Web site as needed. Even though the DRA did not require CMS to 
clarify the requirements for best price, we determined that it is 
reasonable to propose these provisions in this proposed rule, 
consistent with long-standing Medicaid Drug Rebate Program policy, the 
MMA, and our understanding of congressional intent with respect to best 
price as revised by the DRA.
    We propose to incorporate the explicitly listed exclusions in 
section 1927 of the Act, which are prices charged on or after October 
1, 1992, to the IHS, the DVA, a State home receiving funds under 
section 1741 of title 38, United States Code, the DoD, the PHS, or a 
covered entity described in section 1927(a)(5)(B) of the Act (including 
inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the 
GSA; any prices paid under an SPAP; any depot prices (including 
Tricare) and single award contract prices, as defined by the Secretary, 
of any agency of the Federal Government; and payments made by a 
Medicare Part D PDP, an MA-PD, or a qualified retiree prescription drug 
plan for covered Part D drugs provided on behalf of Part D eligible 
individuals. We propose to codify this policy and require that 
manufacturers exclude the prices to these entities from best price. 
Because best price represents the lowest price available from the 
manufacturer to any entity with respect to a single source drug or 
innovator multiple source drug of a manufacturer, including an 
authorized generic, any price concession associated with that sale 
should be netted out of the price received by the manufacturer in 
calculating best price and best price should be adjusted by the 
manufacturer if other arrangements subsequently adjust the prices 
actually realized. We propose to consider any price adjustment which 
ultimately affects those prices which are actually realized by the 
manufacturer as ``other arrangements'' and that such adjustment should 
be included in the calculation of best price, except to the extent that 
such adjustments qualify as bona fide service fees.
    Consistent with our understanding of congressional intent, we 
propose that best price be calculated to include all sales, discounts, 
and other price concessions provided by the manufacturer for covered 
outpatient drugs to any entity unless the manufacturer can demonstrate 
that the sale, discount, or other price concession is specifically 
excluded by statute or is provided to an entity not included in the 
rebate calculation. To the extent that an entity is not included in the 
best price calculation, both sales and associated discounts or other 
price concessions provided to such an entity should be excluded from 
the calculation. The specific terms we propose to clarify and the 
proposed clarification follow.
    The Medicaid drug rebate agreement defines best price, in part, as 
the lowest price at which the manufacturer sells the covered outpatient 
drug to any purchaser in the United States. We propose to codify this 
policy in this proposed rule.
    Customary Prompt Pay Discounts: The DRA revises the definition of 
AMP to exclude customary prompt pay discounts to wholesalers; however, 
we can find no evidence in the legislative history of the DRA that 
Congress intended to change the definition of best price to exclude 
customary prompt pay discounts. Therefore, we pro